Socially Responsible Investing (SRI)

What is Socially Responsible Investing (SRI)?

One of the biggest changes ever in the investment landscape has been the move in recent years to Socially Responsible Investing (SRI). While the concept may have begun in our country as an activity associated with religious societies – the Quakers not participating the slave trade – it has evolved immensely since. It is now a mainstream practice being embraced by both individuals and corporations.

Gone are the days when investors solely focused on factors such as diversification, investment income, rate of return, inflation, taxes and risks.  Nowadays, socially responsible investors are going one step further. They are also choosing to factor in whether a particular investment positively impacts society.

In other words, socially responsible investment works the same way as any style of investing. But in addition to the financial returns from an investment, it also considers the investments’ impact on environmental, ethical or social change

It enables you – the investor – to grow your money while doing good. And it allows you to invest in social causes you care about. 

Why Choose Socially Responsible Investing?

Who wouldn’t want a great way to boost their assets while also making a difference? That’s what SRI does.

Socially responsible investments seek to maximize the welfare of people and their environment while earning a return on one’s investment that is consistent with your individual goals.  In simple terms, the twin goals of socially responsible investing are: social impact and financial gain. 

Some question whether a do-good investment strategy can perform as well as standard investing strategies. The answer is yes. 

A 2020 research analysis from the asset management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

Even today, there are some that have doubts about socially responsible investing. Opponents have argued that by narrowing the field of investment options (such as avoiding weapons makers, gambling and tobacco stocks), the end result is a narrowing of investment returns. 

But now, there is a growing body of evidence (in addition to the aforementioned studies) that shows the opposite is true: SRI not only makes you feel good, but it’s also good for your portfolio.

What’s the Difference Between SRI and ESG Investing?

While at first glance, both SRI and ESG (Environmental, Social and Corporate Governance) investing look at a company’s broader impact, there are some distinct differences between the two.

First off, SRI investing is not as well defined as ESG investing. SRI is more subjective and based on an individual’s view of the world – political views, what is right and wrong, and what is ethical, etc. 

In contrast, ESG investments are measured by and scored on specific environmental, social and governance metrics. More specifically, ESG investing looks at specific factors, such as a company’s best practices when it comes to pollution or women’s rights

SRI, on the other hand, takes these factors into account and blends them with an investor’s personal values.

Bottom line: SRI involves screening investments to exclude businesses that conflict with the investor’s values. While ESG investing focuses on companies making an active effort to either limit their negative societal impact or deliver benefits to society (or both).

How to Participate in Socially Responsible Investing?

You have a number of options available to you if you want to invest in good causes. You can make socially responsible investments via individual stocks. However, the better (and safer) bet is to do so through socially conscious mutual funds and exchange-traded funds (ETFs).  A simple search on Magnifi indicates numerous ways for investors to access SRI funds with low fees.

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This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.



Energy

Energy is vital for the well-being of the global population and a necessity for economic and social progress. It is also essential to our daily lives. We’re reliant on energy to power our cars and trucks, heat and cool our homes and offices, wash our clothes, manufacture goods, etc.

As the global population continues to grow, so will the demand for energy. Which is why investing in the energy sector could be an important move for your portfolio in years to come.

What is the Energy Market?

The energy market is composed of a large group of companies that produce or supply energy. It includes drillers, refiners, producers, companies providing equipment & services, and exploration companies in the oil & gas sector. The sector also includes integrated power utility companies such as renewable energy.

Investing in non-renewable energy provides exposure to natural gas, petroleum, and coal. Uses included heating and electricity generation, fuel for transportation, feedstocks for chemicals/plastics/synthetic materials. The major advantages of non-renewable energy are its reliability and ease of extraction, given that it is not weather-dependent, and can be accessed through drilling (onshore and offshore), mining, and fracking (hydraulic fracturing). Currently, about 85 percent of the world’s energy comes from nonrenewable fossil fuels—oil, natural gas, coal.

Renewable energy offers exposure to solar, wind, biofuels, geothermal, and hydropower. In the United States, renewable energy sources currently provide for 12% of total U.S. energy consumption and about 20% of electricity generation. These percentages are expected to grow significantly as public and private sectors shift away from fossil fuels.

Why Invest In Energy?

Presently there are 7.9 billion people inhabiting the world and it’s projected that number will reach 9 billion by 2037. Which is why it’s no surprise that in 2018 the U.S. Energy Information Administration (EIA) released a report that projected that global energy consumption will grow by nearly 50% by 2050.
The EIA also predicts that the share of renewables in the U.S. electricity generation mix will increase from 21% in 2020 to 42% in 2050. Solar and wind generation are responsible for most of that growth. Solar power is forecast to account for almost 80% of the increase in the US’s renewable electricity generation through 2050. And according to Global Market Insights, the global wind energy market should grow by more than 69% from 2021-2027.

You might think that because of these impressive growth forecasts for renewable energy that the non-renewable energy market will begin to shrink but that’s not the case. The transition away from non-renewable energy will not happen overnight, and will be measured in decades, not years. This is attributed to technological advancements that make oil and natural gas cost-competitive to extract, a lack of infrastructure to support complete green energy deployment, and the fact that a significant portion of end-use demand for oil has limited alternatives. The EIA is forecasting oil prices to be 25% higher by 2030 and 86% higher by 2040. They also predict that the natural gas share of the U.S. electricity generation mix will remain at about one-third of total generation from 2020 to 2050.

How To Participate In Energy Investing?

Picking individual stocks in the energy sector can be tempting with the potential for high returns for early investors. However, diversification is the superior strategy, as not all energy stocks will be winners. Therefore, the best solution is gaining exposure to the sector through energy-focused ETFs and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access tech funds with low fees.

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This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.



Growth of Capital

Capital Appreciation

What is Capital Appreciation?

Capital appreciation refers to the increase in the price or value of assets since their date of purchase.  Put simply, it is the difference between the purchase price (cost basis) and market price (current price) of an investment.

For example, an investor buys 100 shares of a stock at $50, for the cost of $5,000.  If that stock rises in price to $75, he/she would have a 50% return ($2,500 profit) from capital appreciation. 

In addition to stocks, the capital appreciation investment strategy is used in a variety of assets, such as exchange traded funds (ETFs), mutual funds, commodities, real estate, and collectibles.  When such assets are sold, the profit is called a capital gain.

Why Investors Utilize a Capital Appreciation Strategy?

When successful, a capital appreciation strategy allows investors to benefit from above-average market returns.  For example, since 2006, one of the best performing capital appreciation mutual funds had an average annualized return of 14.52% compared to the 10.89% return of the S&P 500.  At first glance that might not seem like a big difference but if you invested $100,000 in the capital appreciation fund, it would be worth $764,223, versus $471,396 if you invested the S&P 500.

Capital Appreciation vs. Income Investing

The objective for the capital appreciation strategy is to invest in assets with the expectation they will increase in value. This strategy has a high growth objective and therefore assumes a higher level of risk.  

Due to this increased risk, younger investors often adopt the capital appreciation strategy.  Younger investors have jobs and earn salaries to pay for their day-to-day expenses.  Therefore, they can tolerate more investment risk in hopes of producing outsized returns.

Older investors, especially those that are retired, tend to shy away from the capital appreciation strategy and instead focus on income investing.  That’s because retirees are more risk averse.  They no longer receive paychecks from their employers and are reliant on the capital they’ve saved throughout the years to generate income.  

Income investing is an investment strategy that is centered on building a portfolio that generates a regular, dependable stream of income, which is paid out as a result of owning an asset.  This income can be in the form of dividends, bond yields, rent, and interest payments.

However, it’s important to note capital appreciation and income investing aren’t exclusive to younger and older investors.  People of all ages diversify their portfolios to incorporate both strategies.  For example, there are growth stocks that pay dividends and the value of rental properties appreciates over time. Therefore, when choosing between these strategies, investors must decide what their risk tolerance is, what their investment goals are, and what their time horizon is. 

PROS and CONS for Capital Appreciation Investing

PROS

  • Capital appreciation investments funds have historically beat the S&P-500 
  • A long-term approach benefits from deferred tax liabilities, with an investor only taxed when they realize the gain

CONS

  • Investments are generally higher risk with a weighting towards growth, which can lead to higher volatility
  • There is no guarantee of returns compared to income-generating investments, which is why a longer time horizon is important

How To Invest In Capital Appreciation 

The key to outperformance using a capital appreciation strategy is rigorous analysis, research, and diversification. Therefore, a great way to benefit from capital appreciation strategies from stocks is through the use of ETFs or mutual funds focused on this approach. For other assets, it’s recommended to seek out advice from trusted and experienced advisors.  A simple search on Magnifi indicates numerous ways for investors to access capital appreciation strategies.

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This blog is sponsored by Magnifi. The information and data are as of the September 7, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.] 



Growth Investing

What is Growth Investing?

We’ve all heard of the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) as examples of hyper-growth stocks, but opportunities in growth extend well beyond just technology.

Growth investing is a strategy that focuses on stocks that are growing their earnings and revenue at a higher rate than their respective sector and the overall market. This growth is expected to continue for the foreseeable future but there are no guarantees.

These companies are often at the forefront of emerging trends, are working to solve a significant issue, or have simply developed a better “mousetrap.” Take for instance Home Depot, which opened in 1978 and has grown into one of the largest companies in the world by offering customers a wide variety of merchandise at lower prices and with a highly trained staff. Or Netflix, which in 2007 launched a streaming service, thus ending the need for physical video/DVD rental companies.

History has shown us that the most successful growth stocks are younger companies boasting meaningful increases in quarterly/annual earnings per share, with new products/services that change our everyday lives. When it comes to identifying the best growth stocks, it’s best to focus on those companies with quarterly earnings per share growth of at least 20%, though this can be more difficult to find consistently in the large-cap space.

For investors, growth investing opportunities span across all industries. However, the most favorable have typically been Medical/Biotech, Consumer/Retail, Leisure/Entertainment, and Technology/Computer/Software. The true leaders can command triple-digit earnings multiples and offer quadruple-digit returns for those fortunate to uncover the winners early, with investing in the growth arena being a never-ending treasure hunt. This is why many investors choose to invest in growth stocks through exchange-traded funds (ETFs). ETFs make it easier for investors to have exposure to baskets of growth stocks based on particular industries and the market capitalization of the companies (small-cap, mid-cap, and large-cap).

Why Invest in Growth?

Growth stocks are attractive to investors because they offer the potential for outsized returns. For example, from 2010 – 2020, growth stocks rallied 372% compared to the S&P 500’s 297% gain. Over a larger time-frame from 1926 to 2017, Large-Cap Growth has returned 9.7% annualized, which is exceptional given that 1930-1950 was a lost decade for the market, as was 1972-1982, with minimal upside progress and violent secular bear markets.

Rather than looking for profits in the form of dividends from large, mature, less volatile companies, growth investors are searching for profits through capital appreciation. Capital appreciation is the rise in the asset’s (in the case a stock) price. Most growth stocks don’t pay dividends because they are still unprofitable or they reinvest their profits in order to develop newer and better technologies.

This is why growth stocks tend to outperform in bull markets. Investors have abundant confidence during bull markets and are willing to take on more risk investing in smaller emerging companies. However in bear markets, growth stocks tend to underperform as investors are more likely to be risk averse and often invest in more stable assets such as blue chip stocks, bonds, or gold.

Growth Investing vs. Value Investing

Value investing is an investment strategy based on fundamental analysis. While growth investors look for stocks with significant earnings and revenue growth, value investors instead search for stocks that have fallen out of favor and are undervalued in the marketplace. The expectation is that the prices of value stocks will appreciate when other investors recognize their true value.

Value investing is considered less risky than growth investing. That’s because value stocks are often larger, much more established, less volatile, and provide a source of income through dividends, regardless of capital appreciation.

Value stocks tend to outperform growth stocks during bear markets. For example, during the dot com bubble in the late 1990s, growth stocks significantly outperformed value stocks. However, when the recession hit in 2001, value stocks outperformed growth stocks.

Therefore, long-term investors often utilize both strategies, growth and value, to create a balanced portfolio. This allows them to realize returns throughout periods of economic expansion and contraction.

How to Invest in Growth

Though opportunities are abundant in the growth arena, only the most lucrative companies will survive, and competition is cutthroat. Given the difficulty in picking the winners, the best solution is investing through Growth-focused ETFs and mutual funds, which offer the following:

  • Diversification: protecting one’s self from a couple of disastrous ideas, and improving the odds of latching onto a massive winner.
  • Market-leading returns: with growth fund managers focused on capital appreciation and spending heavily on state-of-the-art research, and they can latch onto emerging trends and technologies early.
  • Fund management: skilled experts identify the best opportunities, and employ the best time-tested strategies to enter and exit positions. This takes the emotion out of the equation, which is what causes most individual investors to consistently underperform the market, even if they do uncover great companies

For those interested in Growth Investing, and potentially participating in the next major story like the massive FAANG outperformance in the past decade, a simple search on Magnifi displays numerous ways for investors to gain access to growth with low fees.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

This blog is sponsored by Magnifi. The information and data are as of the Aug 12, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.] 


Innovation

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What is Innovation?

The desire to innovate is a basic human characteristic, defined as the creation, development, and implementation of a new product, process, or service, with the goal of improving efficiency and effectiveness. From the compass that dates back to 12th century China to the steam engine that fueled the Industrial Revolution and the discovery of electricity and the invention of transistors, innovation has improved our lives exponentially.

More recently, innovation has come in the form of the internet, artificial intelligence (AI), clean energy transportation, and autonomous vehicles. Since its humble beginnings in the ‘90s, the internet has grown to 4.6 billion users, with over 5 billion mobile phone owners and more than 2 billion of these users shopping online each year. AI technologies are transforming how our society communicates and operates by way of virtual assistants, manufacturing robots, social media monitoring, and proactive healthcare management. Meanwhile, battery-run electric vehicle sales are estimated to hit 29% of all cars sold by 2030, paving the way to a cleaner future globally. And autonomous vehicles, also known as self-driving cars, will reduce traffic and parking congestion, decrease accidents caused by human error, and curtail pollution.

Innovative technologies will disrupt major industries, leaving many of the former players obsolete. With modern-day Edisons’ like Elon Musk, Sergey Brin, and Marc Benioff continuing to sprout up and the American Dream is still alive and well, innovation is here to stay and will only accelerate as the years go by.

For investors, the opportunities to participate span across many industries, with quadruple-digit returns often waiting for those able to hunt down the leading-edge companies in the groups experiencing the most significant innovation. For those that neither have the time or expertise to analyze a multitude of companies, exchange traded funds (ETFs) are excellent ways in which to invest in these innovative industries.

Why Invest in Innovation?

People are often resistant to change, but with multiple secular trends changing the landscape of our world rapidly, investing in innovation is essential to staying ahead of the curve. This is evidenced by the average tenure of S&P-500 companies sliding from 33 years in 1964 to 24 years in 2016, with expectations of being just 12 years before the end of this decade. While antiquated companies whose stocks have provided quadruple-digit returns in the past might be familiar to investors and easy to understand, they typically lag the performance of their more innovative peers, with the best-returning stocks being those 15 years or less out from their IPO date. So, while easy to understand and familiar technologies might be suitable for everyday life, they’re inferior in the ever-changing investment landscape. This means that if investors want to place themselves in the right proverbial fishing holes for market-beating returns, keeping a close eye on new trends and innovative technology is imperative.

What Are the Top Innovation Trends?

When it comes to the top innovation trends, there are dozens of opportunities. We’ve compiled a list of what looks to be some of the most relevant opportunities and areas investors should be focused on. Each of these trends have a variety of ETFs for investors to participate in:

Artificial Intelligence (AI) has arrived in a big way though many people are unaware how it affects their everyday lives. Current applications include online shopping & advertising, vehicles, and even our smart appliances, with more advanced applications being cybersecurity, and healthcare with improved diagnostic pathology. The global AI market is projected to reach $191.60 billion by 2025, growing at a CAGR of 36.68% over the forecast period.

Autonomous Vehicles are currently at an early stage but it is an emerging trend, with many companies battling it out to take over market share. A significant benefit of these self-driving vehicles is the elimination of human error. Government data has estimated that driver behavior and error are factors in 94% of crashes. Increased levels of autonomy would reduce human error, making the roads safer for everyone. The other major benefit is reduced congestion and an expected decrease in pollution & emissions.

Blockchain is one of the least understood but one of the most significant innovations. It is a system of recording information in a way that makes it near impossible to hack or cheat the system. A blockchain is essentially a chain of data blocks with contained information that is recorded, made public, and cannot be altered. Annual spending on blockchain solutions is expected to come in above $15 billion by 2023. If adopted, disruption opportunities are widespread, with one target being the banking industry by disintermediating services that banks provide.

Genetics is expected to be a major area of innovation in the next decade, with genetics being a branch of biology that deals with the heredity and variation of organisms. Gene editing has been called the most significant innovation of the decade by some sources, given that it allows scientists to change the DNA of organisms, including plants and animals. In humans, this offers the ability to treat inherited diseases, with the first application being in eye surgery to treat inherited blindness. Other significant opportunities include agriculture, with the ability to increase yields and quality and plant drought resistance for crops.

Industrial Robotics is another innovation that has arrived quicker than most expected, providing a massive boost to productivity for corporations. Unlike humans, robots don’t need incentives to perform at their full potential, don’t need sleep, and can keep up a consistent pace 24/7. While opinions are divided on robotics given that it displaces jobs at many plants and warehouses, the two major benefits they do offer outside of cost savings for corporations are safety and precision. In mining, it’s much safer to send robots one mile below the surface to carry out tasks, and in healthcare, precision is everything when it comes to surgery. In a world where investors demand higher profits and margins, the opportunities across dozens of industries will continue to grow.

Virtual and Augmented Reality is one of the newest avenues of innovation, with VR offering a complete immersion experience using a headset and AR being an interactive experience of a real-world setting with the objects being enhanced through the use of a smartphone, like the Pokemon Go craze in 2016. The most obvious application is gaming, but many other industries are adopting AR, including manufacturing, mining, education, and travel. In the latter case, consumers now have access to a 360-degree tour of hotels, restaurants, and tourist spots to give them an idea of what to expect. Some estimates project a 40% compound annual growth rate looking out to 2028 for AR alone, with the potential for this market to reach a size of more than $300 billion.

How to Invest in Innovation?

Given that there are hundreds of innovative companies out there and the success rate is concentrated to only a tiny portion of the group, it is essential for investors to diversify their holdings. This is especially true given that the path to success is quite bumpy for even the largest and most successful companies, with the best evidence of this being the turbulent climb to the top and bifurcated returns of the Internet and Communications stocks of the ‘90s. The solution to this issue is investing through Innovation-focused ETFs and mutual funds, allowing one to participate in the upside of innovation, without taking on the significant risk of picking the laggard or company with a fatal flaw in an emerging industry. A search on Magnifi indicates numerous ways for investors to access Innovation with low fees.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

This blog is sponsored by Magnifi. The information and data are as of the Jul 23, 202 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Volatility

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Volatility

The value of the stock market goes up and down, meaning that those invested in stocks and funds gain and lose money over time without taking any action. This movement is a feature, not a bug — the stock market is designed to continuously shift and change.

This up-and-down fluctuation in the value of the market, and of individual stocks and funds within the market, is called volatility.

What Is Volatility?

Volatility is a measure of how much the price of a stock or the value of the market changes over a specific period. That is to say, it’s an indication of how big, erratic, and rapid the up-and-down swings are.

The statistical measure typically used to assess volatility is standard deviation, which indicates how far the highs and lows stray from the average price. A stock or fund whose value is cratering and/or skyrocketing is very volatile, while one that shifts only a little does not have much volatility.

Volatility is a term that has negative connotations; many people use it to indicate a downward swing or crash in the market. However, volatility makes no judgement. The concept also includes upswings, which can help investors make money.

The idea to take away is that the greater the volatility, the riskier the investment. More than anything, volatility is an indication of short-term uncertainty.

How To Assess Volatility

You can assess the volatility of an individual stock or fund by looking at a metric called beta, which measures its historical volatility in relation to the S&P 500 index. If the beta is greater than one, the stock or fund has historically been more volatile than the S&P 500. A beta less than one indicates that the stock or fund has historically been more stable than the S&P 500. And a negative beta — an unusual occurrence — shows that the stock or fund has typically moved opposite the S&P 500.

You can assess the market as a whole by looking at the Chicago Board Options Exchange Volatility Index (VIX), which measures how much volatility is expected in the market in the next 30 days. The specific number the VIX lands on doesn’t really matter; its movement is more significant — if the VIX jumps upward, that usually means that a lot of volatility is on the way. This is why its other names are “Fear Gauge” and “Fear Index.”

Implied Volatility vs. Historical Volatility

Traders might look at two different types of volatility when judging what is likely to happen. Implied (or projected) volatility is a prediction of how volatile the market will be over a certain period. This metric is calculated using the prices of options. Since this is a prediction, it isn’t set in stone; the market may move differently than an assessment of implied volatility suggests it will.

Historical (or statistical or realized) volatility is a measure of how volatile a stock has been in the past during a particular period. It usually measures volatility by looking at the change in the closing price from one date to another, usually 10 to 180 trading days apart.

How Much Market Volatility Is Normal?

It is common and expected for markets to be volatile on a regular basis. During any given year, investors typically expect returns to deviate some 15% from average. Periodically — say once every five years — you’re likely to face more volatility, perhaps around 30%.

The amount of volatility that’s normal in a market is related to the general trend of the market at that time. The market can be either “bullish” (trending upward) or “bearish” (trending downward). Bullish markets are typically fairly stable, while bearish markets often have high volatility, with unpredictable swings that end up moving the market downward.

How to Handle Market Volatility

To be a savvy investor, you must learn to be comfortable with volatility. A cardinal rule of investing is to resist selling a stock or fund as soon as the price plunges. In fact, that old saying “buy low, sell high” should be your guiding principle — when the price takes a hit, it’s a better time to invest than to sell.

Historically when the market falls a lot, it comes back stronger — generating large gains once it recovers. Knowing this can help you avoid the mistake of selling when you shouldn’t. Also keep the following advice in mind:

  • Stick to a long-term plan: If you need the funds you’re investing in the near term, then you shouldn’t be in the market in the first place. The stock market is best left to those who can let their money weather the volatility and see eventual gains over years of investing.
  • Buy low: Purchasing stocks and funds that have had a strong track record during downturns is like buying good products at a discount. If you do so with the long term in mind, you may well eventually see a large return from the decision.
  • Keep some liquidity in your finances: You can remain sanguine about market volatility if you don’t need to pull your money out right away. You should have enough cash on hand in an emergency fund or other savings account so that you can safely leave your portfolio alone, even when prices are dipping downwards.
  • Rebalance your portfolio: Since volatility can result in changes to the relative values of the investments in your portfolio, it’s a good idea to rebalance periodically to make sure your asset allocation remains where you want it.
  • Get out of the market if you’re about to retire: Investors who are close to retirement will find too much risk in the naturally volatile stock market. They should put up to two years’ living expenses in non-market assets such as bonds, cash, home equity lines of credit, and cash values in life insurance.

How ETFs and Mutual Funds Can Protect You Against Volatility

One way to volatility-proof your investments is to choose some well-diversified ETFs or mutual funds, which can offer some downside protection and reduce your risk. Since these funds bundle multiple stocks — sometimes as many as 1,000 — they are likely to be somewhat insulated from the risk presented by volatility.

While both ETFs and mutual funds can help diversify your portfolio and reduce your risk, ETFs may be a better option for responding to volatility because of the speed of transaction they enable. It can take several days to make changes to a traditional mutual fund, while ETFs are traded like stocks and can transact much more quickly. This means you can take advantage of dips in the market by quickly investing more in your ETFs, or, if you’re so inclined, sell your shares quickly at a high point.

How Volatility Can Benefit Investors

While some investors may think they can use volatility to their advantage by waiting for stocks and funds to dip down before buying, then immediately selling at the next high point, it has proven difficult for such active management to beat the returns of a well-balanced mutual fund or ETF that tracks the market. Many investors therefore swear by a buy-and-hold strategy, which requires keeping investments long term so they rise gradually with the market.

Using a buy-and-hold strategy allows investors to double down on their investments in solid companies or ETFs when the market is at a low point due to volatility, setting themselves up for larger cumulative gains over time.

Those who do wish to use volatility to their advantage in a more active way have the potential to make big profits fast. However, you need to be very comfortable with risk and use some strategies to mitigate it. When investing during a volatile market with the intention of trading in the near term to make a profit, consider your position size and stop-loss placement. Doing smaller trades and using a wider stop-loss than usual can reduce your risk. Another good strategy is to seek out trending stocks or funds that have shown strong growth but haven’t accelerated faster than the broader market..

Takeaways About Volatility

  • Volatility is how much the price of a stock or fund moves away from the average price, either up or down or both, in a given period of time.
  • Volatility is a normal part of the stock market; investors can expect 15% movement away from the market’s average in any given year, and will see greater fluctuation periodically.
  • Investors can weather volatility by sticking to a long-term plan, using a buy-and-hold strategy, and maintaining enough liquidity in their finances.
  • Investors can benefit from volatility by buying on downswings and then holding onto their assets over time as the market gradually climbs.
  • Those who want to use volatility to make big gains need to be very comfortable with risk and use strategies to reduce it.

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This blog is sponsored by Magnifi. The information and data are as of the Jul 13, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


International Bonds

With the globalization of business and investing, companies around the world can tap investors outside their domestic markets for financing. One way of doing so is by issuing international bonds.

Investors are eager to buy these bonds to diversify their portfolios with international exposure, allowing them to smooth out their potential risk from economic ups and downs at home.

What Is an International Bond?

An international bond is a bond issued by an entity that is not domiciled in the same country as the investor. For example, a U.S. investor may buy a bond issued by a German company in Euros. For the Germany company this is a domestic bond, and for the U.S. investor, it is an international bond. These bonds are usually corporate bonds and are commonly found in U.S. mutual funds.

As with all bonds, international bonds pay interest at regular intervals and pay the bondholder the principal amount at maturity.

Why Invest in International Bonds?

Investors benefit from portfolio diversification by adding international bonds to their portfolios. International bonds provide exposure to other countries and their economic conditions. A U.S. investor whose portfolio includes bonds issued in Asian countries will benefit when Asian economies are doing well, even if the U.S. economy is suffering.

A portfolio that includes international bonds from a range of countries and regions will be relatively insulated against economic downturns in any particular part of the globe.

Types of International Bonds

Domestic Bonds
A company or government entity in a given country can issue, underwrite, and trade these bonds to foreign investors. The bonds use the currency and follow the regulations of the issuer’s country. For example, a bond issued by a German company in Euros and subject to EU regulations is a domestic bond. When a U.S. investor buys the bond, it is an international bond for that investor.

Eurobonds
A company or government entity issues a Eurobond in the currency of one country — not the issuer’s domestic currency — and trades it in another country that is not the issuer’s country. As per the name, the issuers of these bonds are usually European companies, though the bonds can trade in non-European countries. For example, a bond issued by a German company in Japan denominated in U.S. dollars is a Eurobond, or more specifically a Eurodollar bond, indicating the type of currency.

Foreign Bonds
People sometimes use the terms international bonds and foreign bonds interchangeably, but these are different. Foreign bonds are issued in a domestic market in domestic currency by a foreign issuer, following domestic regulations. For example, a bond issued by a German company in the U.S. and valued in U.S. dollars is a foreign bond. There are a range of silly names for foreign bonds to indicate the country and currency in which they are issued, for example a Samurai bond is issued in Japanese yen, a Yankee bond is issued in U.S. dollars, and a Bulldog bond is issued in British pounds sterling.

Risk in International Bonds

While international bonds help investors diversify their portfolios, they can complicate things simultaneously. The bonds may be subject to different regulations and taxation requirements than the investor is used to.

And as they are denominated and pay interest in a foreign currency, their value fluctuates with the economic conditions in the issuer’s country, and with the exchange rates between the investor’s and issuer’s countries. That means that these bonds are subject to currency risk, or exchange-rate risk.

Currency risk is the potential for change in the relative price of two currencies in relation to each other. These fluctuations can introduce instability in profits and losses, requiring various strategies to hedge risk.

How to Invest in International Bonds

There are two ways to invest in international bonds: You can buy the bonds directly or you can invest in a mutual fund or exchange-traded fund (ETF) that focuses on international bonds.

The latter option can be a good idea for all but sophisticated investors, as it can be complicated to directly buy bonds issued in another country. Mutual funds and ETFs also have the benefit of lots of diversification, as there are many bonds bundled into each fund.

One thing to keep in mind when investing is that currency exchange is unpredictable, so you shouldn’t make the mistake of thinking you can guess how things will go. Don’t buy into a foreign bond fund to beat the market; only do it to gain more diversification. It’s wise to keep your allocation in those funds to a quarter at most.

Fees are another thing to think about. If you buy a mutual fund or ETF, you’ll need to pay a management fee, or expense ratio. Look for a fund with an expense ratio below — ideally well below — 0.50%. You may be able to invest in bond funds and ETFs without fees using a commission-free investing app like M1 Finance, Fidelity, TD Ameritrade, Robinhood, or Vanguard.

Key Takeaways About International Bonds

International bonds are a good way for investors to diversify their portfolios with foreign assets and gain exposure to international markets.
International bonds come with high currency risk, which means that changes in the relative values of the currency in which the bond is issued and the investor’s currency could make for some unpleasant surprises.
The simplest way to invest in international bonds is via bond funds for ETFs that focus on international bonds. These funds allow investors to diversify their portfolios greatly and usually have low or no fees.

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This blog is sponsored by Magnifi. The information and data are as of the Jul 13, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Equity Income

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Investing in the stock market can be a risky endeavor. But many investors are looking for returns higher than they can find from the safest bets like government bonds. Those who are interested in getting a steady stream of income from their investments while keeping their risk relatively low will want to consider focusing on gaining equity income.

What Is Equity Income?

Equity income is income that investors earn via stock dividends, which is money that companies pay to shareholders out of their net profits to reward them for investing. You can get dividends either by owning shares of stocks or by owning shares of mutual funds or exchange-traded funds (ETFs) that invest in dividend-paying companies.

Equity income is appealing to conservative investors who are focused on generating long-term income. The large, established companies that pay dividends often have an annual target for a dividend payout rate that they incorporate into their financial planning. This means that investors can count on this income, at least more than they can count on other returns from owning stocks.

That being said, it’s important to know that companies do not have a legal obligation to pay dividends; they can reduce or end them whenever they want for any reason. Dividends are likely to shrink if the company’s profits shrink. But the reverse can be true too — a banner year for the company may result in higher dividends.

‘Income’ Stock vs. ‘Growth’ Stock

Stocks that have a record of paying a regular dividend are knowns as “income stocks.”
These stocks contrast to “growth” stocks, which tend to have a higher level of risk and expectation of return.

The companies that pay income stocks tend to be large, well run, and more stable than the larger equity market. An appealing income stock will be one with less volatility than the market as a whole, but with better returns than are available from other income investments, such as U.S. Treasury bonds.

True to its name, a growth stock focuses more on growth than stability; it’s a share in a company that is on track to grow faster than the market but probably will not be paying any dividends to shareholders. These types of companies tend to reinvest their profits into the business to spur more growth, which might mean high returns but also leads to more potential volatility.

What Is an Equity Income Fund?

An equity income fund is a type of mutual fund that focuses investment on a range of dividend-paying stocks. These funds may target their investments in various ways: by a benchmark dividend yield, a geographical focus, or target companies’ credit-ratings.

As with other types of mutual funds, equity income funds give investors the opportunity to diversify, since they are able to buy an interest in multiple companies via purchasing even a single share of the fund. This provides less exposure to risk than buying individual stocks. Since income stocks are already on the lower end of the risk spectrum, buying equity income funds is a particularly good way to reduce risk.

What Are Forward and Trailing Dividend Yields?

An equity stock’s or fund’s dividend yield is the amount of equity income shareholders receive. Each one has a forward dividend yield and trailing dividend yield, which can help investors assess the payout as a fraction of the price.

A forward dividend yield is an estimate of the dividend yield for the current year, derived from available information. The trailing dividend yield is the amount of the dividend payout during the previous year, based on share price.

Benefits of Equity Income Investing

There are several good reasons to invest in equity stocks and funds.

Long-term income
Investors often seek to hold income stocks for the long term. Those who favor these types of investments prioritize capital appreciation and income instead of rapid growth. One way investors can increase their long-term income from equity stocks is through dividend reinvestment, which allows an investor to reinvest dividends in fractional shares of the stock or fund.

Lower risk than growth stocks
Dividend-paying stocks are seen to be generally less risky than stocks that don’t pay dividends. They carry more risk than other common income investments, such as bonds and cash, but they are less risky than other stocks and mutual funds, particularly growth stocks.

Relatively high potential returns
Compared to other income investments like bonds or money market funds, equity income stocks and funds are apt to provide higher returns. While they may not generate the high returns of growth stocks, they will be a more lucrative investment than a cash account.

To provide an idea of returns, these were the top five dividend-paying stocks on the Russell 1000 stock market index as of June 1, 2021:

  • OneMain Holdings Inc. (OMF) (forward dividend yield of 13.06%)
  • Annaly Capital Management Inc. (NLY) (forward dividend yield of 9.69%)
  • AGNC Investment Corp. (AGNC) (forward dividend yield of 8.03%)
  • New Residential Investment Corp. (NRZ) (forward dividend yield of 7.46%)
  • Equitrans Midstream Corp. (ETRN) (forward dividend yield of 7.35%)

FAQs about Equity Investing

Q: Who should use an equity income strategy?
A: Investors with relatively long-term time horizons for their investing should consider this strategy. Those who need cash-generating investments for major needs like funding retirement can particularly benefit from receiving dividends.

Q: Which kind of stocks are the best fit for an equity income portfolio?
A: An equity income portfolio should focus on domestic, large-cap, and high-profile stocks — companies like Apple, Microsoft, Johnson & Johnson, and Verizon, for example. Add in some mid-size companies and international large cap stocks and you’ll end up with a diversified mix. Try to avoid stocks from companies that have cut their dividend in the past.

Q: What would make you want to sell a stock?
A: Investors should look for dividend yields that are as high as possible. It is a good idea to sell when the price of a dividend stock appreciates faster than the growth of the dividend, meaning that the dividend effectively yields less over time. It’s also smart to sell stocks of companies that are paying out a large percentage of earnings in dividends.

4 Ideas to Remember About Equity Income

  • Equity income is a good way of securing long-term income, and reinvesting dividends can make a big difference in your overall returns over time.
  • Equity income investing focuses on achieving relatively low risk and relatively high return — a good middle ground between risky growth stocks and extremely safe but less lucrative income investments like bonds.
  • Income stocks, which pay dividends, are usually shares of large, established companies.
  • Investing in equity funds allows investors to diversify their holdings while keeping risk relatively low.

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This blog is sponsored by Magnifi. The information and data are as of the Jul 13, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Active ETFs

An Exchange Traded Fund (ETF) is an investment vehicle that bundles a diversified portfolio of stocks and bonds, with shares sold on the stock exchange. 

While ETFs started as passive investment vehicles, there are many that are now actively managed — overseen by fund managers who choose stocks and/or bonds in an effort to achieve above-market returns. These managed funds are called actively managed ETFs or active ETFs.

How Do ETFs Work?

An ETF functions like a cross between a stock and a mutual fund. ETFs are traded on an exchange like a stock. Yet these funds are comprised of shares of many stocks and bonds, like a mutual fund. As such, an ETF is a low-cost and tax-efficient option to invest in a variety of asset classes and investment strategies. 

ETFs tend to have lower annual expenses than mutual funds, but due to the fact that they are traded like stocks, they come with higher transaction costs such as commissions, bid-ask spreads, and other fees. 

What Is an Active ETF?

Most ETFs are passively managed — they track an index such as the S&P 500 or the Nasdaq. But as ETFs have grown in popularity, more and more of them have become actively traded, meaning that the fund’s manager actively buys or sells stocks and/or bonds to try to beat the market and generate higher returns. 

Despite the growth of active ETFs, they are still quite a small part of the overall ETF market. There were more than 500 actively managed ETFs in the U.S. in 2021, which accounted for about $193 billion in assets under management. That may seem like a lot, but these comprise less than one-fifth of all U.S. ETFs and make up about 3.5% of the total dollar amount invested in ETFs. 

Why Are Active ETFs Surging? 

The market for ETFs has more than quadrupled in less than a decade, leaping from $1 trillion in 2010 to more than $4 trillion in 2019. In 2018 alone, institutions currently investing in ETFs bumped average allocations in these funds to 24.8% of total assets, a significant increase from 18.5% in 2017. This phenomenal growth is driven by enthusiasm among institutional investors: 78% of institutional investors prefer ETFs to other index vehicles, according to a 2019 study of ETFs by Greenwich Associates.

There are several catalysts behind this surge in active ETFs, including the following. 

No Minimum Costs

Active ETFs have a far lower barrier to entry than mutual funds, which is the other actively managed product people invest in. Actively managed ETFs do not require a minimum investment, unlike mutual funds, which typically demand an initial outlay that can run into the thousands of dollars. An investor can buy a single share or fraction of a share of an ETF, allowing them to add an actively managed investment to their portfolio for as little as $1. While it’s important to be alert to fees and commissions associated with ETFs, many brokerages now offer commission-free trading, which makes ETFs even more affordable and accessible.

Tax Advantages

ETFs are known for tax efficiency in contrast to traditional mutual funds. ETFs are often more tax-efficient because they are index funds, which have fairly low turnover and thus provide less chance to realize gains when stocks or bonds are sold. More importantly, ETFs have a particular structure that is even more central to their tax efficiency. Shares of ETFs are created and destroyed through in-kind transactions that take place between the fund’s sponsors and an organization called an authorized participant. Due to this set-up, ETFs don’t usually have to directly sell positions from their portfolios to meet redemptions and can in this way avoid taxable capital gains distributions.

Rapid Risk Management 

Volatility in world events and economic circumstances in the last few years has left traders with a taste for being able to easily and rapidly manage risk as things change. As investors seek to reposition their portfolios to address a variety of risks, ETFs are a good tool to actualize specific changes without undue hassle. Other characteristics of ETFs, such as execution speed, single-trade diversification, and liquidity, are also helpful in mitigating risk. 

Versatility 

Institutional investors continue applying ETFs to more and more portfolio functions. This is possible because these funds have phenomenal versatility and can be applied to a wide range of strategic and tactical goals. It helps their popularity that institutional investors tend to prefer ETFs for factor-based and other specialized exposures.

Downside Protection

Early in 2021, actively managed ETFs clocked in at $200 billion in combined assets under management. Investors continue to seek out high returns with robust downside protection in an economic environment that remains in turmoil. Active management can be a key to that downside protection, and active ETFs are an affordable and accessible option for investors. 

What Are Common Active ETF Applications? 

  1. Tactical adjustments: Strategically tweak a portfolio to increase or reduce exposure to certain styles, regions, or countries.
  2. Strategic allocation: Bolster a portfolio with a long-term strategic holding.
  3. Rebalancing: Reduce risk between rebalancing cycles.
  4. Portfolio management: Round out and balance strategic asset allocation.
  5. Global diversification: Get access to foreign markets.
  6. Cash flow management: Help maintain liquidity.
  7. Transition enablement: Enable smooth management transitions. 
  8. Risk reduction: Mitigate risk and hedge changes in allocation.

Pros and Cons of Active ETFs

Pros

  • Active ETFs do not have investment minimums, and thus have a low barrier to entry. 
  • Many brokerages offer commission-free trading, making ETFs affordable and accessible.

Cons

  • Active management does not necessarily translate to higher returns.
  • Active ETFs charge higher fees than passive ETFs regardless of performance.

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This blog is sponsored by Magnifi. The information and data are as of the June 21, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Global Investing

Global Investing

U.S. investors tend to stay close to home, prioritizing domestic stocks and funds. But non-U.S. markets comprise 57% of global investment opportunities, which means that close to half of those opportunities exist beyond U.S. borders. Some of the world’s largest technology, energy, and financial companies are international, such as Samsung in South Korea, Mitsubishi in Japan, ING in the Netherlands, and Allianz in Germany.

What Is Global Investing?

For many investors in the U.S., going “global” means investing in European companies. But this is a limited — and limiting — view of global investing. There is plenty of energy in non-U.S. and non-European markets around the world, from Southeast Asia to South America to Africa and beyond. 

Global investing means taking all of the markets around the world into consideration and putting some of your investment dollars in stocks and funds outside of the U.S. and Europe. 

Global Fund vs. International Funds

In the world of investing, “global” and “international” are not interchangeable terms the way they are in other contexts. Global funds and international funds are distinct, with different rules, goals, and opportunities.  

Global funds are comprised of securities from around the world, including the investor’s home country. Global funds give investors the chance to diversify and reduce country-specific risk while still including their own country in their investment portfolio. 

International funds, on the other hand, contain securities from around the world with the exception of the investor’s home country. These funds are a way for investors who already have a robust domestic portfolio to diversify outside that sphere. 

Why Invest Globally?

Investing globally — and for U.S. investors, specifically beyond the U.S. and Europe — is an effective way to reduce risk in a portfolio and also opens up the door to investing in all sorts of opportunities that don’t exist in one’s home country. 

As we pull out of the acute phase of the coronavirus pandemic, the economies of emerging-market and developing economies are projected to grow faster than the United States. These countries are on track to be the largest contributors to global GDP by 2042, and by 2050 will account for almost 60% of the world economy.

Accordingly, developed and emerging markets are beating the S&P 500 so far this year, with China, South Korea, and Japan showing strongest growth. In fact, some analysts are predicting that foreign equities might outperform U.S. stocks as a whole in 2021.

The growth of global funds in particular is a huge opportunity for investors. PwC predicts that global assets under management will reach $145.4 trillion by 2025, almost double the $84.9 trillion that was under management in 2016.

Investors who overlook these opportunities are limiting their ability to diversify, which increases risk in their portfolios. Owning a globally diversified portfolio protects investors against seeing serious losses when stocks in one country suffer setbacks that aren’t felt elsewhere.

Overlooking global investments also causes investors to miss out on some phenomenal investment options. There are exciting things unfolding in business around the world — in Brazil and China and Eastern Europe, for example — and U.S. investors who aren’t tapped into global options will lose a chance to capitalize on that energy. 

How to Invest Globally

While global investments are unlikely to make up a majority of a U.S. investor’s portfolio, it’s a good idea to target a sizable chunk of assets to invest overseas. According to Christine Benz, Morningstar’s director of personal finance, professionally managed asset allocations typically target 25-33% of the portfolio in overseas investments. This can be a good benchmark for individual investors to look to. 

Investors can add global investments to their portfolios by buying stocks or exchange-traded funds (ETFs).

Stocks 

There are a number of ways to invest in foreign stocks. U.S. depositary banks issue American Depository Receipts (ADRs) that attest to a right to ownership of a share or fraction of stock of a foreign company that trades in U.S. markets. U.S. Investors usually find it more convenient to own the ADR instead of the share of foreign stock itself. Alternately, depositary banks in an international market, usually in Europe, issue Global Depository Receipts (GDRs) that attest to ownership of shares in a non-U.S. company. GDRs are available to institutional investors in and outside the U.S.

Some investors may find it advantageous to invest directly in the stocks or bonds of foreign entities, perhaps with an eye toward acquiring a decisive stake in a company. This is not a good strategy for the casual investor, as there are many complex factors involved in these transactions, such as tariffs and trade barriers.

Exchange-traded funds (ETFs) 

ETFs group many different stocks or bonds — sometimes thousands — into a single fund that is traded on the stock exchange like an individual stock. These funds can focus on global stocks and sometimes have a regional focus. Individual investors are not allowed to buy mutual funds that are based outside their home country, so investors should buy a fund based in their own country that includes global investments. 

4 Ideas to Remember About Global Investing

Global investing is a good strategy for those who want to reduce their risk, open themselves up to exciting new opportunities, and become more sophisticated in their investing approach. Here are four important ideas to remember when considering global investing:

  • U.S. investors should look beyond Europe to truly diversify their investing globally. Great opportunities exist in regions all over the world. 
  • Global investing allows you to diversify your money and mitigate your risk so that when stocks in a given country take a hit, your portfolio stays strong.
  • Being open to investing beyond the U.S. and Europe opens up many phenomenal investment opportunities that you may have not known existed. 
  • Global funds are a fast-growing and potentially lucrative investment opportunity.

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This blog is sponsored by Magnifi. The information and data are as of the Jun 17, 2021 (publish date) unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]